Oklahoma Education Savings Plans
Wednesday, Dec 22 2021
We all know college is expensive, and tuition costs are rising. The average student loan debt is $36,510 per borrower. A college savings strategy can help you pay tuition and reduce student loan debt. Focus Federal Credit Union can help you with Oklahoma education savings plans.
Coverdell Education Savings Account
A Coverdell Education Savings Account is a way to save up to $2,000 in after-tax contributions per child, per year for K-12 and college expenses. Accounts must start before the beneficiary reaches the age of 18. The account owner is generally the parents or grandparents.
Contributors must have an adjusted gross income of less than $110,000 as a single filer or $220,000 if filing jointly. Non-deductible contributions must be cash but grow through tax deferment. Non-qualified withdrawals may be taxed, while money withdrawn for educational expenses isn’t.
Since contributions are limited to $2,000 per year and only until the child reaches age 18, the maximum contribution is $36,000. Even with compounded earnings, it may not be enough to pay a significant portion of college expenses.
Oklahoma 529 College Savings Plan
College 529 plans are savings plans, usually sponsored by state governments. They encourage saving for future education costs. Nearly every state has at least one 529 plan available. And you’re not limited to using your home state’s plan.
In Oklahoma, it’s called the “Oklahoma College Savings Plan.” You can start an account with as little as $25, and contributors can deposit a maximum of $300,000.
Multiple family members and friends can contribute to the account — think holiday and birthday gifts.
Your student can use the money for a wide range of educational expenses. These expenses include tuition at any accredited college, vocational, or other post-secondary learning institution in the United States. It even includes specific colleges abroad.
Your student can use up to $10,000 annually toward K-12 tuition at a qualified program. Beyond tuition, plans can help pay for qualified expenses, including books, room and board, computers, and internet access.
Oklahoma education savings plans offer investment options tailored to your risk tolerance and goals. The account may go up or down in value based on investment performance. Money grows on a tax-deferred basis, meaning your money grows tax-free until you decide to withdraw it for school. There are no additional taxes for money withdrawn for qualified education expenses.
There is no age limit to the Oklahoma education savings plans. And you can change beneficiaries from one child to another if the original beneficiary decides not to attend college or doesn’t use all the plan’s funds.
A common misconception is 529 plan assets disqualify your child from financial aid. When the student heads to college, you will need to fill out the Free Application for Federal Student Aid. The form will ask for tax return information from two years prior. The impact of the 529 plan depends on who owns the account and money distribution.
Consider the following about ownership:
- Parent or Guardian Owned. The 529 plan would fall under the parents’ assets on the FAFSA. If the plan is in a parent’s name, it would have minimal impact on the student’s eligibility for financial aid.
- Student Owned. The 529 plan is a student asset. In this scenario, a student is eligible for less financial aid.
- Grandparent, Friend, or Relative Owned. The student would need to report withdrawals as unearned income on the FAFSA. That negatively impacts the student’s eligibility for financial aid. If a grandparent or other relative has an Oklahoma education savings plan for your child, reserve the money for their junior or senior year. Then it won’t affect their undergraduate financial aid eligibility.
Mutual funds are simple, diverse, and relatively affordable. These traits make them a financial tool worth considering for college savings. Mutual funds pool money from multiple investors into one large investment. Investments may include stocks and bonds chosen to provide a return on investment.
Mutual funds offer you control and flexibility. You choose funds based on your risk tolerance, timing, and preferences.
There is no limit to how much you can invest in mutual funds. There are no restrictions or penalties if you sell and use the money for something other than college.
But there are risks and considerations to weigh. The funds you invest could be worth more or less than the principal you invested. Earnings from mutual funds are subject to annual capital gains taxes. And when you sell the funds to pay for college, you’ll pay taxes again.
You likely associate an individual retirement account with retirement savings. The benefit of investing in a Roth IRA for retirement makes it a tool to consider for college savings.
Like the 529, there is no income tax deduction. Contributions and earnings grow tax-free. You can withdraw contributions at any time, for any reason, tax-free. If you don’t spend the money on college, the funds remain in the Roth IRA to fund retirement. The FAFSA doesn’t consider Roth IRA funds.
If you have children later in life or are saving for a grandchild, Roth IRAs offer an added benefit. Once you reach 59.5 and contributed for at least five years, your withdrawals are tax-free, including earnings and contributions. This change means 100% of your withdrawals go toward college expenses.
But unlike 529 plans, family and friends can’t contribute directly. And you can only contribute up to $6,000, which can help but likely won’t cover all college costs.
U.S. Savings Bonds
People have used saving bonds since the Great Depression. You may want to consider them as an element of your college savings strategy. Series EE or I Bonds can help save for college. The bonds must be in the name of one or both parents, not in the child’s name.
Savings bonds are a government-guaranteed, safe, low-risk investment. They’re easy to purchase and affordable. You can buy bonds at face values as low as $25. The maximum investment allowed is $10,000 per year.
Savings bonds offer a low, steady guaranteed rate of return, and you can’t lose the principal. If you purchase a savings bond for $100, you can count on it being worth at least $100 when you cash it out.
You can also take advantage of the Savings Bond Education Tax Exclusion. This tax code exemption allows you to avoid taxes when cashing in savings bonds for higher education expenses. To qualify, you must pay the college expenses during the same tax year in which you redeem the bonds. The disadvantage to bonds is they don’t keep up with college inflation, which averages 3% to 5% per year.
Talk to the Experts
It’s never too early or too late to start saving for college. Focus Federal Credit Union has financial advisors to help you make the best choice for your college savings goals. Contact us today to learn more.